The battles between Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) are legendary. The gains in their stock prices over the decades have been legendary as well. But, sadly, the days of enormous increases in these companies' share prices is likely over. It is time to settle in and enjoy the dividends. The question is, how will investors fare if they buy these companies for their dividends over a long time horizon?
Both Microsoft and Apple now fit nicely into a dividend growth portfolio. Let's take a look at what investors might expect if Microsoft and Apple continue paying out increases in their dividends.
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The first striking thing we notice is the phenomenal growth rate of Microsoft's dividend, both over the past year and the past five years. There are not many companies with a 17% average dividend growth rate over the past five years.
Apple only recently started paying a dividend again so the data is much more sparse. They did have a dividend increase of 15% this year, but that is all the data we currently have on them. However, it is very important to point out that neither company has much debt and both have a low payout ratio. The payout ratio for Microsoft is 36% and the payout ratio for Apple is 29%. These low payout ratios will allow both companies to increase their dividends for a long time to come even if earnings aren't increasing.
The goal here is to analyze how much value each of these companies will add to a portfolio over the long run due to their increasing dividends over time. It would probably not be realistic to assume that Microsoft will continue its 22% dividend growth rate that we saw over the past year. So I assumed that Microsoft's dividend will grow at an average rate of 15% over the next 15 years. Note that 15% annual dividend growth is exactly what Microsoft has had over the past decade. As for Apple, I believe they can easily sustain their 15% dividend growth rate going forward.
For a moment let's assume that over the next 15 years both companies have no growth in their stock prices. Given this, if we assume both continue to growth their dividends at 15%, it is obvious that Microsoft will have a larger return since it has a higher dividend yield. I ran the following results in our free calculator called Dividend Yield And Growth.
Over the 15-year period Microsoft returns nearly 180% (7% per year) while Apple returns nearly 140% (6% per year). This is just due to their dividends. We can now ask the question, what does Apple's dividend growth rate have to be such that it has the same compounded return over this time frame? The answer is 18%, which is certainly achievable for Apple.
This is an interesting case study in dividend investing because we can see that by investing in these companies for their dividends, one would be betting on them maintaining a high level of dividend growth. If they do, this would be a wonderful long-term investment where the stock price becomes nearly meaningless since the vast majority of return would be due to dividends.
It is also important to point out that dividend paying stocks such as Microsoft and Apple can help a retirement plan immensely, especially vs. low-yielding treasury bonds. I plugged in the two stocks I analyzed here into our retirement planner in place of the ten treasury bonds that were in the portfolio before.
I found that if a typical 55-year-old couple with $400,000 in assets moves 50% of their funds from treasuries to dividend payers such as Microsoft and Apple, over ten years they will have increased the time that their funds last in retirement by over 13 years.
When constructing a dividend portfolio for the long run, it is important to keep in mind just how important both the dividend growth and the yield are over time. Selecting companies which have consistently strong dividend growth over long time periods can mean the difference between early retirement and working a lot longer.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT, AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.